The European Central Bank probably won’t be able to declare the end of its historic interest-rate hiking cycle anytime soon, according to President Christine Lagarde.
“It is unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have been reached,” she said Tuesday in Sintra, Portugal. “Barring a material change to the outlook, we will continue to increase rates in July.”
In a speech to kick off the ECB’s annual retreat, Lagarde also said that “we need to communicate clearly that we will stay ‘at those levels for as long as necessary.’ This will ensure that hiking rates does not elicit expectations of a too-rapid policy reversal and will allow the full impact of our past actions to materialize.”
The final stages of the ECB’s monetary-tightening campaign are the focus as headline inflation fades but underlying price pressures prove stubborn. A majority of economists sees officials pausing after July, though markets are leaning toward another hike after the summer.
Lagarde said the early effects of policy tightening are becoming visible, particularly in manufacturing and construction “- sectors that are more sensitive to rate changes. At the same time, a catch-up in wages will continue to exert upward pressure on underlying prices, she said.
Inflation remains the primary concern, but policymakers are gathering amid a worsening economic backdrop. Figures Monday showed an unexpectedly large drop in Germany’s business outlook, while data last week signaled activity in the 20-nation euro zone almost stalled in June.
While economic expansion is “on the soft side,” Latvian central bank Governor Martins Kazaks told Bloomberg Television on Tuesday it’s not weak enough to bring down inflation by itself, signaling the possibility of rate hikes beyond July.
“Faced with a more persistent inflation process, we need a more persistent policy “” one that not only produces sufficient tightening today, but also maintains restrictive conditions until we can be confident that this second phase of the inflation process has been resolved,” Lagarde said.